Business Context and Reporting Period
This Form 8-K, dated October 24, 2012, reports on the initial public offering (IPO) and related transactions of Lehigh Gas Partners LP (the Partnership). The filing details the entry into material definitive agreements and the completion of asset contributions that occurred on October 30, 2012. The Partnership operates in the wholesale motor fuel distribution and retail gas station sectors.
Key Financial Metrics and Capital Structure
- Offering Proceeds: The Partnership sold 6,000,000 common units at $20.00 per unit. Net proceeds received were approximately $111.6 million (after underwriting discounts, structuring fees, and expenses).
- Debt Facility: Established a new senior secured revolving credit facility of $249 million, expandable by an additional $75 million, maturing October 30, 2015.
- Debt Repayment: Proceeds were used to repay approximately $57.9 million of indebtedness under the new facility and $14.3 million in outstanding mortgage notes.
- Related Party Payments:
- $13.0 million paid to entities owned by adult children of Warren S. Kimber, Jr., for preferred equity cancellation and accrued dividends.
- $20.0 million distributed to Topper Group Parties as reimbursement for capital expenditures or asset purchase consideration.
- Equity Issuance: Issued 1,525,000 Common Units and 7,315,605 Subordinated Units to Topper and controlled entities (representing 58.7% of total outstanding units).
Material Changes and Agreements
The filing documents a fundamental restructuring of the company's capital and operational framework:
- Underwriting Agreement: Entered into an agreement with Raymond James & Associates, Inc. for the public offering. An option for underwriters to purchase up to 900,000 additional units was granted.
- Omnibus Agreement: Lehigh Gas Corporation (LGC) will provide management, administrative, and operating services. The Partnership pays a management fee of $420,000 per month plus $0.0025 per gallon of motor fuel distributed.
- Credit Agreement: The new $249 million facility includes financial covenants requiring a Combined Leverage Ratio of no greater than 4.40 to 1.00 (tightening to 4.25 to 1.00 after Dec 31, 2013) and a Combined Interest Charge Coverage Ratio of at least 3.00 to 1.00.
- Wholesale Supply Agreement: A 15-year exclusive distribution agreement was signed with Lehigh Gas - Ohio, LLC (LGO), a related party managed by CEO Joseph V. Topper, Jr.
Outlook, Risks, and Contingencies
- Subordination Period: Subordinated Units will convert to Common Units only after the Partnership earns and pays specific distribution thresholds ($1.75 or $2.625 per unit annually) over consecutive periods ending after 2013 or 2015.
- Related Party Risks: Significant transactions involve the Topper Group and LGC. The Omnibus Agreement includes indemnification provisions where LGC indemnifies the Partnership for pre-closing environmental liabilities and tax liabilities, capped at $5 million for general services (excluding bad faith).
- Conflicts of Interest: The agreement includes a right of first refusal for the Partnership to acquire assets in the wholesale motor fuel or retail gas station businesses if the Topper Group identifies such opportunities.
- Covenant Restrictions: The credit agreement restricts distributions to unitholders if the Partnership is not in compliance with financial covenants or if a default event occurs.
Investor Verification Checklist
- Verify the exact utilization of the $111.6 million net proceeds against the stated debt repayments and related party payments.
- Review the "dealer tank wagon" pricing mechanism in the Wholesale Supply Agreement with LGO to ensure market-rate compliance.
- Monitor the Partnership's Combined Leverage Ratio and Interest Charge Coverage Ratio to ensure compliance with the new credit facility covenants.
- Assess the potential dilution impact of the 900,000 option units and the future conversion of 7.3 million Subordinated Units.
- Examine the environmental indemnification escrow accounts and insurance policies referenced in the Omnibus Agreement.